Cherrytree Group LLC Blog

....by Warren Kirshenbaum

Acquiring capital for real estate investments is a difficult and daunting task in this weak economy.  The uncertainty of the real estate market has become a strong barrier between investors and real estate developers, leaving developers with very few options for obtaining capital.  The absence of eager/willing investors has prompted real estate developers to seek innovative means of financing.  One attractive source of financing is through foreign investment that is generated through the EB-5 Green Card program.  EB-5 is part of the Immigration Act of 1990 established for the purpose of attracting foreign capital to the United States.  Under this program, 10,000 green cards are set aside every year for qualifying candidates.  A qualified candidate must satisfy three basic requirements in order to be considered for approval.  These basic requirements include 1) establishing a U.S. business or investing in an existing business that was created or structured after November 19, 1990, 2) the foreign national must have invested $1 million in the business or $500,000 when investing in targeted employment areas and 3) the newly created business must create full time employment for 10 U.S. workers for a specified amount of time.  Once these requirements are met, the EB-5 investors must also demonstrate that they, their spouses and their children under the age of twenty-one have resided in the U.S. for two years by means of conditional visas.  

The EB-5 Program promotes the infusion of foreign capital into the American economy. This benefits real estate developers seeking additional investment capital for their projects.  The U.S. developer can obtain financing from the foreign investor in order to commence or complete local development projects.  This is a great opportunity for American developers to secure capital for their projects in an economy where banks are denying loans and U.S. investors are reluctant to invest in new endeavors.  The program not only benefits U.S. developers, but also offers incentives to foreign investors desiring to live out the American dream.  In exchange for the investor’s capital being put to work in the U.S., they receive green cards for themselves and their families as long as all of the program requirements are met.  This is a win-win situation for both the U.S. developer and the foreign investor in achieving their goals of real estate investment/development and expedited permanent residency status, respectively.  

EB-5 applicants invest foreign capital through Regional Centers that have varying investments programs.  The Regional Center may be a state government agency, a corporation or a private venture.  Companies or private entities that are approved EB-5 Regional Centers can directly contact foreign investors who are interested in participating in the immigration program. The Regional Center must verify that the investor’s capital was earned through lawful activity; otherwise it cannot be utilized for the program.  Once all of the required elements are met, the Regional Center can begin the application process for the foreign investor.  Don’t know where there is a regional Center? The Cherrytree Group can help you find one in your area.

At the Cherrytree Group we have extensive knowledge in structuring investments to achieve the optimal return on investment. The EB-5 provides valuable investment to new real estate development projects.

... By Warren Kirshenbaum

Baltimore Area Institutions to Receive Over $155 Million in New Markets Tax Credit Awards

BALTIMORE, MD - In an effort to highlight the Obama Administration’s key investments in broad-based economic growth and commitment to the revitalization of communities stricken by the economic crisis, Community Development Financial Institutions Fund Director Donna Gambrell today visited a job training and human services organization in Baltimore benefiting from private sector investments made possible through the New Markets Tax Credit (NMTC). Speaking alongside Representative Elijah Cummings, Director Gambrell announced the selection of 99 organizations nationwide to receive NMTC allocation awards under the 2010 program round. These 99 awards will leverage billions of dollars of investment into businesses and real estate projects to create jobs and promote growth in communities with high rates of poverty and unemployment.

“The New Markets Tax Credit continues to be a tool for job-creation and economic revitalization in areas that struggle to attract investment because of poverty, unemployment and a lack of opportunity” said Director Gambrell. “I am honored to announce the 2010 New Markets Tax Credit Award allocations with Representative Cummings here in Baltimore, where our partners have demonstrated why this tool has been so effective in making literally thousands of projects possible across the country and give Americans a chance to make a living, to start a business and to build a better future in areas that need it most.”

The NMTC, established by Congress in December 2000, permits individual and corporate taxpayers to receive a credit against federal income taxes for making equity investments in investment vehicles known as Community Development Entities (CDEs). The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. CDEs must apply to the Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) to compete for this allocation authority. The 99 organizations receiving awards were selected from a pool of 250 applicants that requested over $23.5 billion. They are headquartered in 27 different states and the District of Columbia; but have identified principal service areas that will cover nearly every state in the country, as well the District of Columbia.

“By helping our partners in community development secure critical funding for job-creating projects, the New Markets Tax Credit is helping to bring opportunity and drive investment in our local businesses and communities,” said Representative Cummings. “In these tough economic times Baltimore welcomes the support of the CDFI Fund, and we will continue working to ensure that we're reaching the hardest hit.”

Director Gambrell’s and Representative Cummings’ announcement was made today at Humanim Inc., a nonprofit organization that provides workforce development and rehabilitation services to individuals with disabilities and other barriers to employment. An award winning human services organization, Humanim provides a ground-breaking model for delivering expanded employment services that gives those individuals in greatest need the opportunity to build a career and attain financial independence. Over $14 million in NMTC financing provided by City First Bank of DC and the National Trust Community Investment Corporation allowed Humanim to convert a large brewery that sat abandoned for 35 years in one of the poorest neighborhoods in Baltimore into its headquarters. Humanim reaches individuals of all ages with comprehensive vocational services.

Having benefitted from funding under the NMTC, Humanim highlights the effectiveness of the NMTC in leveraging private investment to complete economic and community development projects that help revitalize communities with high rates of poverty and unemployment. In total, five institutions in Maryland will receive funds in this NMTC award round to invest in development projects.

To date, over $20 billion of private-sector capital has been invested through the NMTC into urban and rural communities throughout the country, helping to create or retain hundreds of thousands of jobs and to provide low-income community residents with access to quality education, health care, job training, housing and critical retail services in their communities.

2010 NMTC Program Awards

2010 NMTC Program Award List
2010 NMTC Program Highlights
2010 NMTC Program Allocatee Profiles
2010 NMTC Program Award Booklet

A complete list of the 99 organizations selected and additional information on the NMTC Program can be found on the CDFI Fund’s web site at: http://www.cdfifund.gov.

By Warren Kirshenbaum

The Federal Reserve's plan to purchase $600BN in US Treasuries has wide ranging consequences, including the devaluing effect that the influx of such a large amount of dollars will have on the dollar itself. A devalued dollar makes US produced goods cheaper, causing exports to rise. As a deficit nation, the US benefits from an increase in exports, but it comes at the expense of other countries. Therefore, this plan has been roundly criticized by many countries who claim that the US is manipulating its currency, and as the issuer of a global reserve currency such as the dollar the US has a responsibility to keep the dollar fairly valued. It is certainly an interesting position for currency manipulating countries like China to take, but nonetheless this is the position they are taking, and as we will discuss below their influence on our domestic interest rate environment is significant.

So, what effect will the Fed plan have on mortgage rates? As the Federal Reserve's monetary policy has been to keep the Federal Funds rate at less than 1% for some time now, long term interest rates have remained low. Mortgages are generally priced off the 30 year Treasury bond, which is currently yielding 4.25%. Average 30 year fixed mortgages are pricing at 4.625%. In that a bond's yield increases as the price of the bond decreases, if the prices of US Treasuries decline, then yields will increase. Bond prices have been trending higher for several days now on concerns of inflation and uncertainty about the Fed's plan to buy treasuries.

So let us analyze this situation. As a deficit nation, we spend more than we receive. The only way to sustain such behavior is to borrow funds to finance the shortfall. Many nations have large stockpiles of US dollars from trading with us, and many more hold their reserves in dollar denominated assets. These dollars need to be put to work, and the value of dollar denominated assets need to remain steady for these countries to continue to run surpluses which are need to finance their economic growth, provide infrastructure and provide basic services for its citizenry. Therefore, there are a large number of countries buying US debt in the form of US treasuries. If other countries, like China decide that the US economy is shaky and they reduce their purchases of treasuries, or even begin to sell off the treasuries they currently own, bond prices would fall and yields will increase. That would mean that other countries would be unwilling to finance our debt at the same levels as they have been. In that case, with the Fed itself buying US treasuries, there will not be an excess supply of treasuries, which will keep their prices steady, or even cause an increase in bond prices. It would appear, however, that if we were in a deficit to begin with, the only way the Fed could buy treasuries would be to print more money to do so, which will improve the cash position of the US but deflate the dollar, and obligate us to greater borrowing costs. An increase in the US cash position, together with an increase in exports could have a formidable effect on our current account surplus and reduce our deficit, but clearly we are devaluing the dollar and annoying our trading partners whose point is well taken. They say that the US should be able to increase its exports by improving its competitiveness not devaluing its currency. Nevertheless, this seems to be a short term plan on the part of the Fed. Basically, increased export production can lead to the creation of jobs, and a lowering of the unemployment rate, which leads to a rise in consumer confidence. Mortgage rates and other borrowing costs could increase, which would lead to manufacturing price increases and, therefore, an increase in the prices of consumer goods, i.e. inflation.

So we are trading deficit reduction and job creation for inflation and higher borrowing costs. What all of this will do for our businesses and economic outlook is anyone's guess, but it is certainly shaping up to be a challenging time period.

... by Warren Kirshenbaum

It is my opinion that banks really do not have much incentive to lend money. Banks can borrow money from the Fed at rates that approximate zero, and they can then purchase US Treasuries and return a 3 point spread with little to no risk. Accordingly, why would they be willing to incur the time consumption of due diligence, the transaction expenses, and the inherent risk of loaning money to consumers and businesses when they can be profitable borrowing from the Fed, lending to each other, and engaging in hedging transactions. Nevertheless, as their apparent mandate is to take in deposits and then loan those funds out to borrowers while maintaining a reserve of funds to maintain net capital requirements, they need to put some money out to work in loan transactions but their documents, loan covenants, underwriting requirements, equity requirements, and debt-service coverage ratios are very restrictive, and in some cases are either unprofitable for borrowers or are putting businesses in the position of having to run business decisions by their bankers prior to accessing necessary working capital or credit line funding. I have been promoting for some time now that businesses need to create their own sources of funding, in order to decrease their reliance on bank financing, which is fast becoming a scarce resource. Private equity or corporate debt issuance is a viable option in these economic times, and I urge businesses of all sizes and levels of growth and development to formulate a plan to tap their non-bank resources for capital funding.

Interestingly, a midterm election that changes the majority party in Congress, such as the 2010 Midterm elections did can have a profound effect on the business plans of many different types of companies. For example, those businesses that supply the defense industry may find that under a Republican controlled Congress there are more dollars appropriated to defense spending, and will benefit from such a political change. Those businesses that are non-unionized may find that a Democratic Congress or state administration would be more favorable to union labor and open-shop employers may find that the cost of labor would dramatically increase, effectively turning a company’s cash flow upside down. Any of these factors would cause a company to need to seek financing to smooth out the edges while it re-formulates its business plan and carves out new market niches for itself.

My message is that if you are hoping to seek bank financing, you should add to your quiver of options the possibility of raising funds using private equity, or by issuing corporate bonds or debt instruments. As you are setting the terms of the offering or issuance you are in more of a position to control and accept provisions, terms, covenants and this will be beneficial to your business interests, and that will spur, and not hamper or restrict growth. We, as small business people are in need of capital and funding to execute many, if not most of the objectives of our business plans, but the sources of capital have become restrictive, unwieldy, and stifling. It is time to change the terms of this game, and look for alternate sources of funding.